Lending Implications of U.S. Bank Stress Tests: Costs or Benefits?

62 Pages Posted: 24 May 2017 Last revised: 18 Aug 2017

See all articles by Viral V. Acharya

Viral V. Acharya

Professor; New York University - Leonard N. Stern School of Business; New York University (NYU) - Department of Finance; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); National Bureau of Economic Research (NBER)

Allen N. Berger

University of South Carolina - Darla Moore School of Business

Raluca A. Roman

Federal Reserve Bank of Philadelphia

Date Written: August 17, 2017

Abstract

The U.S. bank stress tests aim to improve financial system stability. However, they may also affect bank credit supply. We formulate and test opposing hypotheses about these effects. Our findings are consistent with the Risk Management Hypothesis, under which stress-tested banks reduce credit supply – particularly to relatively risky borrowers – to decrease their credit risk. The findings do not support the Moral Hazard Hypothesis, in which these banks expand credit supply – particularly to relatively risky borrowers that pay high spreads – increasing their risk. Results are generally stronger for safer banks, banks that passed the stress tests, and the earlier stress tests.

Keywords: Bank Stress Tests, SCAP, CCAR, Regulatory Disclosure, Lending, Risk

JEL Classification: G18, G21, G28

Suggested Citation

Acharya, Viral V. and Acharya, Viral V. and Berger, Allen N. and Roman, Raluca A., Lending Implications of U.S. Bank Stress Tests: Costs or Benefits? (August 17, 2017). Journal of Financial Intermediation, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2972919 or http://dx.doi.org/10.2139/ssrn.2972919

Viral V. Acharya

Professor ( email )

44 West 4th Street
Suite 9-160
New York, NY NY 10012
United States
2129980354 (Phone)
2129954256 (Fax)

HOME PAGE: http://www.stern.nyu.edu/~vacharya

New York University - Leonard N. Stern School of Business ( email )

44 West 4th Street
Suite 9-160
New York, NY NY 10012
United States
2129980354 (Phone)
2129954256 (Fax)

HOME PAGE: http://www.stern.nyu.edu/~vacharya

New York University (NYU) - Department of Finance

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Allen N. Berger

University of South Carolina - Darla Moore School of Business ( email )

1014 Greene St.
Columbia, SC 29208
United States
803-576-8440 (Phone)
803-777-6876 (Fax)

Raluca A. Roman (Contact Author)

Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States

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